March 12, 2016

Avoid Wasting Money on Costly Mortgage Insurance

A few weeks ago, two people asked me questions regarding the same subject, their mortgage insurance; they were concerned and had some doubts about it.

My initial intentions on the matter were to quickly write about them while adding brief comments. I started my draft. But ideas kept coming the more I thought about it.

After a while, I finally decided to let my mind go on and freed up my pen (it’s more like my keyboard but you know what I mean); a «quick beef» post transformed into a much more elaborate article.

So here’s what came out of it. Hope you like it! 

The conversation I had with those folks reminded me of an Article I wrote back in 2010. Looks like the financial institutions are still singing the same old tune.

It was kind of late for them because it seemed like they already wasted a lot of money on these products, but as they say, better late than never.

With their permission, I will abort the outline of their respective situations. Afterwards, exposing my point of view, I’ll share with you 12 Helpful Tips about Mortgage Insurance.

Note that to protect their privacy, some figures have been altered and rounded up, irrelevant details may also have been omitted but the spirit of each situation was respected.

The Average Person Pays Too Much

First off, my neighbor (we will call him Joe) is renewing is mortgage soon and did not really know how much his mortgage insurance cost him so far.

After he looked at his papers, he told me, he and his wife were paying a monthly premium just over 80$ on their 210K$ original mortgage. The bank clerk already told them their insurance could be renewed at the same rate.

This means they paid just under 5K$ for their insurance the first 5 years of their mortgage.

Joe was pretty mad when he realized it: « Five thousands bucks! », he angrily said.

At first glance, their coverage looked nice and included life insurance, disability insurance, critical illness insurance and even job loss insurance.

But the decreasing life insurance would only be paid if both of them died, the disability insurance would not get paid if another contract was in force (Joe already has disability insurance at work) and the critical illness insurance seemed very restrictive.

Since I could not give Joe direct advice (I remind you that I’m not a licensed professional to do so) and that a consulting service was available at Joe’s workplace, I suggested him to use it.

Later, Joe was glad to get back to me.

The counselor helped him set up life insurance using his group policy. He was able to get a coverage of 350K$ for him and 250K$ for his wife. Going forward, they will pay about 18$ on their biweekly paycheques (which is around 39$ per month) to cover all their life insurance needs. An adequate coverage was important because they have 2 young kids.

The counselor also told them their working conditions already covered them in case of short-term and long-term disability. In addition, their positions offered relatively strong job security. Employment insurance mandatory for Canadian workers would kick in and give them time to get back on their feet in the remote eventuality of a job loss.  

Most Canadians deeply need to feel secure and financial institutions make sure they can profit from their uneasiness.

I would be tempted to say that most of the time, the average Joe pays too much.

If it’s available to you, Taking advantage of group life insurance is often a cost-effective way to obtain sufficient coverage for you and your family.

Only Pay for Coverage You Need

Another example came to me from a co-worker (we will call him Rick). Ten years ago, single Rick had the opportunity to buy his uncle’s house. He had to contract a 300K$ mortgage despite getting a very good bargain and great value out of it.  The house was too big but Rick did not mind because it had always been his dream home; it would be perfect to one day, accommodate his future large family.   

Back then, inexperienced Rick paid «only» 0.21% for life insurance and 0.28% for disability insurance on his mortgage loan. He had the impression it was mandatory and did not find it that expensive.

But being single, Rick did not need life insurance; the value of the house would be more than enough to cover his final expenses and pay off his debts: his mortgage and a small student loan.

And again, disability insurance was not necessary because Rick had great disability coverage at work.

He was kind of devastated when he realized he had squandered more than 10K$ on useless insurance.

For now, I spared him the part about wasting another 25-30K$ just for Choosing a fixed-rate mortgage instead of a variable-rate one. But that’s a whole different story by itself.

Rick got engaged last summer and the good news is that with what he’s saving, he’ll be able to afford more than adequate life insurance coverage for his family because he really needs it now; as lovely Lucy (not her real name but I like it) is expecting their first child.

The agent Rick contacted did a thorough analysis of their family’s financial needs. Among other adjustments, he set up a term life insurance to complement the coverage Rick was able to get from our group policy. That contract also includes an amount in the unfortunate eventuality of Lucy’s death because her current job does not procure any possible coverage.

I find it very sad that many people waste money on life insurance when they are young and single or later in life when they are old and rich. And the other way around, that they don’t have enough coverage when it would be necessary as their family financially depend on them.

I think many of us should focus only on having adequate life insurance when we really need it: usually when we have young dependable children. Many young families think they can’t afford it because they don’t look at the proper options; they could get sufficient coverage simply by using cheaper ones like group or term insurance.

Folks should really stop viewing life insurance as a lottery where you get lucky and rich or even worse, as an investment vehicle. Why not simply use life insurance as an effective way to protect your loved ones as for a while, they depend on your ability to put food on the table. 

To complete this overview in the 12-Minute spirit, we are now submitting you 12 pointers to help make decisions regarding mortgage insurance easier.

Please note that this list may not be complete and that our modest review should NOT be considered exhaustive.

Hence, you may gain from considering some of our points but you should be extra careful before applying them to your own and unique situation.

In the same fashion and as with any contract for that matter, reading the fine prints may be in order to assure you really get what think you are paying for. Unfortunately for most of us, we often don’t take enough time to do all that necessary but fastidious reading.

1-Some mortgage life insurance benefits are regressive

The coverage of some mortgage life insurance contracts may actually decreases as time goes by because they only cover the outstanding balance of the loan.

Premiums may even remain flat or worse, increase with age despite benefits potentially going down.

2-Beware disability insurance exclusions

As with any disability insurance, mortgage disability insurance often include exclusions.

Some contracts may not entitle you to benefits even if you’re not able to attend your present job as they will only get paid if you are not able to occupy ANY job. For instance, a construction worker would not get paid after a broken leg because he would still be able to accomplish clerical work. This can be pretty inconvenient for people not suited for that kind of work behind a desk.   

In a similar way, other policies may exclude claims following a pregnancy or childbirth. Not practical for all those young devoted mothers out there.

3-Mortgage insurance is NOT mandatory

Contrary to popular belief, most of the time, it is not required to insure a mortgage or a loan.

Some people think they absolutely have to buy mortgage insurance as their financial institution may lead them to think so. Banks will often tell clients they have to do it to protect themselves but also to project the bank’s investment.

In practice, mortgage insurance is more like an opportunity for them to sell you additional products and make more money. Especially with mortgages, in case of default, ceasing the house and selling it should be plenty enough to cover the amount that was lent.

That being said, in many cases, buying mortgage insurance or proving you are insured otherwise may enable you to get more interesting conditions. Regarding those kind of matters, don’t be afraid to ask questions and negotiate.

4-Explore cheaper alternatives like group insurance

Shop around and get your insurance elsewhere, not necessarily at the bank.

If it’s part of your work benefits or available to you through some other association, group insurance is often the cheapest alternative.

For life insurance, term insurance is generally the most cost-effective option. Note that group life insurance is a form of term life insurance.

5-Always buy insurance according to your needs not your means

Insurance should be a product you buy because you need to, not because you are able to.

Ask yourself if you need insurance in the first place? For instance, single person often don’t need insurance as no one depends on them.

Proper insurance coverage is a must for families with young dependable children.

For most people, life insurance needs tend to diminish as you get older. Hopefully, your children will someday be able to fend for themselves and will no longer depend on you financially. 

6-Other programs already cover you

Many of my fellow Canadians crave security, so through the years, numerus social security programs have been set up to offer us protection.

Among many others, Employment Insurance and Social Security protects us if we lose our job (job-loss insurance), a program that protect us in case of work-related accidents is accessible in every province (disability insurance), etc.

The Canada Pension Plan also offers us different protections like life insurance.

Be sure to consider these programs when you evaluate your insurance needs.

7-Consider ALL your insurance needs

Your insurance protection should NOT ONLY cover your mortgage. Rather, it should take into account your entire financial situation and insurance needs.

You could also save on administration fees and pay lower premiums by regrouping your insurance under one contract that covers your entire needs. At least try to reduce your number of insurance contracts; generally, the fewer the better.

8-Some mortgage disability insurance will only cover loan payments

If by misfortune you are disable and cannot pay your mortgage, most contracts will only cover your mortgage payment. It won’t pay all your other bills.

A more sensible approach would be to protect your revenue.

For instance, an insurance that replaces your salary (or part of it) will enable you to pay all your bills (or at least, most of your bills) including your mortgage payment.

9-Calculate exactly how much it will cost you

Financial institutions usually present mortgage insurance premiums as a small percentage to add to your interest rate or a small amount to add to your loan payment.

Take a moment to do the math and estimate how much it will really cost you.

You may be surprised at the actual cost over the next 5 years!

For example, paying 20$ a week on top of your 250$ mortgage payment doesn’t seem like a whole lot more. But 5200$ (20$ x 52 weeks x 5 years) might impress you more!

A gross estimate is enough to take more informed decisions but in fact, the real amount is even bigger if interest is considered.

You’ll be even more shocked when you calculate your cost over your entire amortization period. Several tens of thousands of dollars sure are a lot even if they are distributed over 25 years!

10-You’re getting a loan, not insurance!

Financial institutions always try to find innovative ways to offer you products and services (« sell you » may be a more suitable expression).

We think it’s often a mistake to mix insurance with other products like investments or loans.

Mixing insurance with something else can, most of time, create complex products that can be hard to use and comprehend and that also may incorporate extensive administration fees as well as juicy commissions.

Remember that in these circumstances, salespeople don’t necessarily have your best interest at heart. They can be experts to mystify you with elaborate explanations and justifications.

For most of us, keeping things simple is a more appropriate avenue.

11-Get a complete financial analysis from a pro

Even if you know we like to do things ourselves as much as possible, we don’t consider getting help from a professional a cardinal sin.

In fact, for most of us mere mortals, it can be a must!

Just remember that fee-only financial planners are usually a better option to objectively analyze your financial situation as opposed to compensation based advisors.

Fee-only advisors’ services may be more expensive but their precious advices are worth the price.

To be effective, this professional will perform a complete analysis of your entire financial situation and needs that won’t be uniquely limited to your mortgage or mortgage insurance.

12-Demand proof that your actual health status qualifies you for benefits

To reduce expenses, some insurance providers will not verify if your initial health condition would qualify you for benefits.

They will only engage the qualifying process when and if you place a claim. Some people only discover if they are excluded or qualify after the fact.

That way, you may even pay premiums over the years for nothing because you are not actually being covered.

If you qualify for a valid claim, you will be paid but if you claim is refused, only your premiums will be reimbursed.

The trickiest situation would be that you do not qualify but never place a claim. If that situation, you would really pay insurance for nothing as your premiums will never get reimbursed.    

Thank you for reading and feel free to comment!

Do you have a mortgage insurance (horror) story of your own?

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